Ever worked in a company where if you step outside of the box you are quickly educated as to why you are wrong.
Group thinking comes about because it is safe, if everyone agrees on a process or outcome then you must be right. Anyone who disagrees must be wrong. There is safety in numbers. Inside fund managers and investment banks there is no reward for going against the head of the fund or head of research. It is simply easier to comply and collect your pay at the end of each week. As such many opportunities are passed up.
This goes a step further, if one investment banks puts out a downgrade on a company others are sure to follow. Again it is safer for a research analysis to run with the crowd and hedge their position than make a stand.
This does not help the investor outperform the market.
However, if you are a small long-term investors you are able to go against the trend and buy that company when it is out of favour.
Take Telstra for example, back in 2010-2011 everyone wanted out, downgrades across the board, the price was around $2.80; I had many discussions with clients convincing them to continue to hold. Today the stock is at $4.12. What has changed since 2010, nothing... just group thinking at work.
Employees of investments banks and fund managers are paid salaries plus bonuses. Bonuses are normally paid end of each year based on the performance of the past 12-months. As such their investment time frame is a mere 12-months. If they want that bonus then that out of favour stock needs to bounce back within the 12-month period, if not, no bonus.
This leads to fund managers and investment banks selling out a stock, which has dropped on the back of bad news. In fact it become a competition amongst the fund managers and investment bankers as to who can get out of it first.
Small investors do not have these time constraints; as such we can buy these out of favour companies and hold for the longer term.
Take Westfield; back in the GFC property was not considered a good investment due to the generally high level of gearing. Westfield fell to $7.50 per share. This was a great buying opportunity as the company paid a solid dividend and its gearing level was only 30%.
All of the big funds reduced their exposure, we brought into the company. Now trading at $10.50 our return over the past three and a half years have been around 70%. This is how small investors get their bonus.
Size counts, being small allows you to focus on the results you want and avoids the traps that large business fall into.
If you understand the company you are investing in then buying on weakness provides better returns for the small investor, as the large investor is unable to follow suit.
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